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Building Profitable Business Growth:The IT Leadership Agenda: Building Profitable Business Growth: The IT Leadership Agenda Peter G.W. Keen Professor TU Delft, Netherlands Chairman, Keen Innovations Monterrey November, 2004
Managing (versus leading): Managing (versus leading) Degree of change Time “Natural” change: incremental, inevitable, paced by environment Priority is skilled management and execution Examples: the PC, standard outsourcing
Managing Change : Managing Change Degree of change Time Accelerate change, innovate, mobilize – and execute Examples: process innovation, Logistics, cycle time transformation
Leadership: announcing a discontinuity: Leadership: announcing a discontinuity Degree of change Time Examples: The new business landscape The new IT conversation A new “reality” New “imperatives” A mission, not a strategy
The objectives of this workshop: The objectives of this workshop Announce the discontinuity Bring the business landscape into sharp focus Help define a new IT leadership agenda for directly enabling growth and profits Provide practical guidelines for action that balance risk and payoff Herald the shift from IT to CT – coordination technology
The Challenges to Business and IT Leadership : The Challenges to Business and IT Leadership Profitable growth is an oxymoron – like jumbo shrimp, English cuisine Commoditization is everywhere and increasing Asia is defining much of the global competitive agenda The new fashion is that IT doesn’t matter “Outsourcing” has become core, not peripheral, to more and more areas of business – and IT
The IT agenda for helping respond to the challenges: The IT agenda for helping respond to the challenges Escape the commodity trap Shift from traditional value chain to value webs Move outsourcing to co-sourcing: the global search for talent Help make the innovation shift Contribute to the transformation of financial structures: Welcome to the Variable Cost Economy Gain the coordination edge
Business growth as oxymoron : Business growth as oxymoron Of the 172 companies that had at some point been on the Fortune 50 list between 1955 and 1995, only 5% grew their revenues above the overall inflation rate. Just 13% of a sample of 1,854 companies grew consistently over a ten-year period. Only 16% of 1,008 companies tracked from 1962 to 1998 survived. Of the original Forbes 100 announced in 1917, just one of the 68 companies still on the list in 1987 – GE – had surpassed the average return on the S&P 500 over the seventy year period. From 1997 to 2002, the 30 firms that constitute the Dow Jones index grew at a rate of under 5% in revenues and gross profits and just 0.5% in after-tax profits.
Commoditization: Commoditization Deregulation Globalization Technology Overcapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ?
Commoditization Examples (1): Commoditization Examples (1) Deregulation Globalization Technology Overcapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? PCs, standard IT hardware: from “high tech” to consumer electronics
Commoditization Examples (2): Commoditization Examples (2) Deregulation Globalization Technology Overcapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? Manufacturing: The global outsourcing scramble
Commoditization Examples (3): Commoditization Examples (3) Deregulation Globalization Technology Overcapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? Consumer goods: Weakening of established brands Retailer pricing power
Commoditization Examples (4): Commoditization Examples (4) Deregulation Globalization Technology Overcapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? Pharmaceuticals: Generics Challenges to Big Pharma from Canada, Mexico
Commoditization Examples (5): Commoditization Examples (5) Deregulation Globalization Technology Overcapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? Airlines: The shattering of the majors’ business models Even low cost players going broke
Commoditization Examples (6): Commoditization Examples (6) Deregulation Globalization Technology Overcapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? Telecommunications: Phone call prices trending to zero cents AT&T taken off the Dow Jones
Examples of price erosion (1): Examples of price erosion (1) Consumer electronics: prices of component parts drops 1 percent per week, on average; it used to take ten years for the price of a product to drop from $1,000 to $100; now it takes eighteen months. Security trades: 1996-2002, margins dropped by 50 percent. Telecommunications: the deregulation of long distance phone services in any country typically cuts prices by 40 percent within five years. Jewelry: close to five hundred stores closed in 2003 as Amazon and Blue Nile cut markups on fine jewelry from the industry’s 60-100% range to 15% Engineering services: the price of power plants fell by 50% in the 1990s. China graduated 1 million engineers in 2002. The United States graduates around 70,000 engineers. Automotive: price of cars has grown slower than inflation since 1994
Examples of price erosion (2) : Examples of price erosion (2) Clothing: the price of men’s jeans has dropped by over 40 percent in five years. For retailers, double figure margins are now in single digits in a good year Financial services: in 1999, the average fee to send $300 from the U.S. to Mexico was $60, in 2004, under $10. Processing fees for credit cards on track to drop by 40 percent in this decade, saving retailers as much as $100 billion. The average return for credit card issuers dropped from 3.5 to 1.5 percent between 1992 and 1998. Groceries: prices in an area drop by 13-16 percent when Wal-Mart enters the neighborhood Manufacturing: The prices of goods made in Hong Kong, Singapore, Taiwan and South Korea fell by 22 percent between 1996 and 2002. Half the world’s manufacturing is now carried out in Asia versus around 20 percent two decades ago. BUT………… Energy costs do not commoditize – and often cannot be passed on (e.g. airlines); this is the real China Syndrome
Commoditization Impact: Commoditization Impact Deregulation Globalization Technology Overcapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? For customers: commodity heaven Choice, price competition everywhere
Commoditization Impact: Commoditization Impact Deregulation Globalization Technology Overcapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? For companies: commodity hell Choice, price competition everywhere For customers: commodity heaven Choice, price competition everywhere
The commodity trap: The commodity trap Deregulation Globalization Technology Overcapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? What does a company do? Cut costs? Outsource? Price opportunistically?
The commodity trap: The commodity trap Deregulation Globalization Technology Overcapacity Customer power Aggressive new entrants Price erosion Standardized Interfaces Outsourcing ? What should a company do? Use IT and process innovation to build value web capabilities and roles
So who does make money?: So who does make money? Three exemplars: Dell, Southwest, Wal-Mart Returns to shareholders around 16,000% over several decades Dominate their ecosystem to extent that competitors’ strategies based less of their own ambitions than to find a counterpunch Yet, there is no way they could ever make money No proprietary product or service In commodity industries Self-commoditizing: drive their own prices down all the time and push the industry to follow
The coordination edge: The coordination edge All three companies have an explicit enterprise coordination design owned at the top: Dell: complete synchronization of the demand chain, patented processes Wal-Mart: supply chain/store replenishment integration end-to-end Southwest: standardization of operations, incentive systems All three are superb users not of IT – “information” technology but CT – coordination technology
The IT leadership contribution: The IT leadership contribution Open up a new executive conversation Governance: extended architecture and policy Standardized interfaces: technology and process capabilities Value web enablement Making IT a force for innovation in the commodity world From IT platform to enterprise coordination design
Enterprise Coordination Designs (1): Enterprise Coordination Designs (1) FedEx: Coordinate customer logistics needs via cross-linking ground/air services through an integrated technology platform Toyota: Coordinate global manufacturing via standardized process components; coordinate global product development Li and Fung: Act as a global “orchestrator” for thousands of specialists in apparel manufacturing, contracting to create a mutual balance in value gains
Enterprise Coordination Designs (2): Enterprise Coordination Designs (2) Magna Steyr: Make coordination of customer processes the differentiator of commodity auto parts Amazon: build from the customer contact point back via a modular platform that coordinates the complete customer relationship, partners, service providers, outside systems developers TAL: Extend design, manufacturing and store inventory management into the customer’s processes and take responsibility for demand-supply coordination
Enterprise Coordination Designs (3) : Enterprise Coordination Designs (3) EBay: create and grow a set of communities, acting as relationship coordinator GE: optimize process capabilities through selective standardization, global centralization; “turbocharge” innovation by internal crosslinkages and reuse Procter and Gamble: switch from in-house business and product development to a collaborative network of help and innovation
Commonalities among leading designs: Commonalities among leading designs Ownership at the top (FedEx, Dell, etc.) Inheritance (Wal-Mart) Innovative commoditization (Flextronics, AAM) The Way: diffusion of the design, metrics, incentives across the organization (Cemex, Toyota) Use of Coordination Technology everywhere to selectively centralize, co-source, standardize and reuse capabilities (GE, eBay) Exploitation of standardized interfaces (BMW/Magna Steyr) Value web principles not value chain
Examples of standardized interfaces: Examples of standardized interfaces GSM/SMS: created – and commoditized – the European mobile phone industry; note the U.S. lag USB: enabled and commoditized digital camera market U.S. mortgage market transformed by XML RFID: information moves with the goods Credit cards: airport self-service check in ANSI/EDIFACT EDI “ontologies” Car manufacturing: the Toyota dominance 1-800 numbers: global call center outsourcing Consumer electronics: “HP” printers with HP never involved
Value webs versus chains: Value webs versus chains Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Procurement Technology & Development Human Resource Management Firm Infrastructure Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Procurement Technology & Development Human Resource Management Firm Infrastructure Value chain: Tidy, linear, Control-centered Supply-driven Value webs: Demand-driven, power laws Nonlinear “Scale-free” networks Yahoo, UPS as Hubble Space
Growth platforms:Value web roles: Growth platforms: Value web roles Focus Where growth comes from Control Traditional value chain: in-house capabilities and M&As Coordinate Your own and partner capabilities Service Your coordination on behalf of selective partners Collaborate Close relationships with partners that they make “core’ to their own growth Enable You open up your platform, inviting others to innovate on their own behalf
Product innovation and development : Product innovation and development General agreement that radical innovation opportunities are disappearing Value chain petrification: Big Pharma pipeline drying up, high tech is consumer electronics, no major innovation in auto manufacturing for four decades (until the hybrid car) Collaborate or die: R&D and development as value webs Asia as innovation centers
Emerging trends: Emerging trends Contract manufacturers extending their value web roles: consumer electronics, cell phones (60% now made by third parties) P&G, IBM letting go of their protected patent base: license even to competitors Eli Lilly InnovCenter portal for research problem-solving for a reward fee Global centers of excellence: Motorola, GM, GE, synchronized labs in China, Europe, U.S. Toyota blueprint for global design-production
The search for global talent: The search for global talent Relative labor cost burden Low High Premium Specialist Creative Skill capabilities economy base Commodity Assembly Outsourcing economy crisis creator
The financial imperatives: The financial imperatives Welcome to the variable cost economy The CT platform changes the nature of scaling Supply chain management indicates the extent of the financial value of such a platform: halving of working capital per unit of sales, halving of overhead The linkage between the CT architecture and process “clusters” cuts cycle times by around 40%; time really is money
Business scaling: Up: Business scaling: Up 1995 2000 NOW 2004 Investment Add people, systems, facilities Disruptive, expensive
Business Scaling: Down: Business Scaling: Down 1995 2000 NOW 2004 Investment Cut people, systems, facilities Disruptive, expensive
What’s next?: What’s next? 1995 2000 NOW 2004 Investment ? ? ? ?
An example from a superb company : An example from a superb company
The IT resource: SUPERSTRUCTURES Priority targets: customer relationships, supply chain, financial, organizational, operational; Branding Innovation paths Bundling of distinctive capabilities via infrastructure clusters Process edge – differentiation INFRASTRUCTURES: Clusters of services, Networks of providers and partners; business-, industry- or partnership-focused arrangements SUBSTRUCTURES: Highly standardized foundations; “heat, power and light” systems Automatically interconnected via common interfaces The Web as electricity; Largely usage-based variable cost The IT resource Super Infra Sub
The IT resource: SUPERSTRUCTURES Priority targets: customer relationships, supply chain, financial, organizational, operational; Branding Innovation paths Bundling of distinctive capabilities via infrastructure clusters Process edge – differentiation INFRASTRUCTURES: Clusters of services, Networks of providers and partners; business-, industry- or partnership-focused arrangements SUBSTRUCTURES: Highly standardized foundations; “heat, power and light” systems Automatically interconnected via common interfaces The Web as electricity; Largely usage-based variable cost The IT resource Super Infra Sub Can’t innovate here: may rely on others’ innovations
The IT resource: SUPERSTRUCTURES Priority targets: customer relationships, supply chain, financial, organizational, operational; Branding Innovation paths Bundling of distinctive capabilities via infrastructure clusters Process edge – differentiation INFRASTRUCTURES: Clusters of services, Networks of providers and partners; business-, industry- or partnership-focused arrangements SUBSTRUCTURES: Highly standardized foundations; “heat, power and light” systems Automatically interconnected via common interfaces The Web as electricity; Largely usage-based variable cost The IT resource Super Infra Sub
The IT resource: SUPERSTRUCTURES Priority targets: customer relationships, supply chain, financial, organizational, operational; Branding Innovation paths Bundling of distinctive capabilities via infrastructure clusters Process edge – differentiation INFRASTRUCTURES: Clusters of services, Networks of providers and partners; business-, industry- or partnership-focused arrangements SUBSTRUCTURES: Highly standardized foundations; “heat, power and light” systems Automatically interconnected via common interfaces The Web as electricity; Largely usage-based variable cost The IT resource Super Infra Sub
Imperatives: Imperatives Implicitly begin: “Regardless of how we do it, it is absolutely vital that we………” The link between vision – the goal – and strategy – the “how” Key to avoiding change management overload – when everything is urgent and important, nothing is Reflects the changing nature of change: when is radical jump-shift change easier to handle than never-ending incremental and accelerated change initiatives?
Beachheads: Beachheads Larger than pilots, small enough to deliver in 90-180 days Focused goal of building momentum for innovation Self-explanatory, self-justifying benefits High centrality: visibility, political credibility, link to key constituencies Phase 1 of an “architected” campaign A force for organizational mobilization that balances speed and flexibility of a small team with scale and rollout capacity that a large project can leverage Localized enough so that the leader/sponsor can provide oversight and commitment
Beachhead planning: Beachhead planning For each Beachhead: What is the 90 or 180 deliverable? Warning: if it takes two years, forget it NOW please (FINP) What is the “elevator” pitch about its self-explanatory, self-justifying benefits? If you need to calculate the hypothetical ROI, FINP How does this contribute to the Imperatives? How will it scale and be rolled out across the business? Which leader will sponsor this and put credibility on the line? What new roles and skills will this help build? What are the incentives for others to pick up on the beachhead and commit to moving it forward? What is the 8-15 person team it needs?
IT Matters: IT Matters Global coordination of development and in-sourcing of talent is fundamental to innovation Time is the currency of competition: time-to-market, time from design to production, time to distribute, etc. This alone makes coordination technology the vital force in innovation How to get that across and to whom? The very term Chief Information Officer gets in the way of doing so

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